Commentaries (some of them cheeky or provocative) on economic topics by Ralph Musgrave. This site is dedicated to Abba Lerner. I disagree with several claims made by Lerner, and made by his intellectual descendants, that is advocates of Modern Monetary Theory (MMT). But I regard MMT on balance as being a breath of fresh air for economics.

Tuesday, 26 February 2013

Free banking
is a system under which central banks play a minimal role or don’t exist, and
under which anyone can set up a bank and issue their own bank notes.

For the
great and the good, particularly those on the political left, that’s anathema.
They’ll claim the state (i.e. the great and good) knows best, and should
regulate banks. That’s “great and good” as in “we lot who have made a complete
mess of regulating banks over the last ten years and brought you the credit
crunch, the subsequent austerity, etc”.

Moreover as
George Selgin and other free banking advocates have shown, the historical record
of free banking is good: it involved relatively little inflation and few bank
failures, credit crunches, etc.

However, there
is a crucial weakness in free banking, namely that the occasional bank failure
DID OCCUR in free banking regimes, and the political reality is that the
population nowadays just wont stand for ordinary depositors losing their money
in the event of a bank failure. From which it looks like state sponsored
deposit insurance is here to stay.

But
therein lie problems, as follows.

1. State
sponsored deposit insurance for free banking is almost a contradiction in terms:
i.e. the whole idea of free banking is that the state plays no role in banking.
As this advocate of free banking put it, “Government deposit insurance does not
fit into a free banking system.”

So free
bankers and full reserve bankers agree that state sponsored insurance is
unacceptable.

2. State
sponsored deposit insurance is a subsidy of banking. (Granted there does not
need to be any subsidy element in the case of insurance for SMALL BANKS (as is
the case with FDIC). But in the case of SYSTEMIC FAILURE, and larger banks,
only the state can do a rescue, and that equals a too big to fail subsidy.) And
a state funded TBTF subsidy contradicts the basic idea behind free banking.

3. State
sponsored or not, deposit insurance is pretty much a nonsense anyway. Reason is
thus.

There is a
big range of different ways of saving (e.g. investing in a property to let,
investing in the stock exchange – which itself offers a huge range of different
investments all with varying levels of risk, etc, etc.)Now what’s the point of going for a risky
investment and then insuring against the risk? That makes no sense – unless of
course you’ve spotted some mug who charges an artificially low premium.

And that’s
very much what is involved in state sponsored risk insurance! That is, if your
risky investment goes wrong the taxpayer coughs up. (At least that’s the case
with systemic failure rather than the failure of a small bank.) What more can
you ask for? Heads I win, tails the taxpayer loses. You’d have to be stupid to
turn down an offer like that. But of course that arrangement is not in the
interests of the country as a whole.

So clearly
the latter “deposit insurance / subsidy” nonsense needs removing. And there is
a simple way of doing it: full reserve.

Full
reserve.

Under full
reserve, depositors who want 100% safety can have it, but no risks are taken
with their money. In contrast, those who want their money invested carry the
risk.

And that
very much answers one of the main criticisms of central banks made by free
bankers, namely that central banks are the CAUSE of banking problems, moral
hazard in particular. E.g. see paragraph headed “What about deposit insurance”
here.

So free
bankers ought to welcome full reserve banking in that under full reserve,
taxpayer exposure is minimal.

Should
commercial banks do stimulus?

The only
remaining significant different between full reserve and free banking is that
under full reserve, the commercial bank SYSTEM cannot expand the aggregate
amount of money: only the state and central bank can do that.

In effect,
commercial banks cannot do stimulus under full reserve (or at least one form of
stimulus). Now given that everyone looks to government and central bank to do
stimulus when needed, why let commercial banks do it as well? That’s
duplication of effort.

Moreover,
the commercial bank system is just brilliant at effecting stimulus just when
it’s NOT NEEDED: that is commercial banks lend MORE during an asset price
bubble and exacerbate the bubble. (E.g. see chart here showing the rapid
expansion in the UK of commercial bank money/loans relative to the monetary
base in the three years before the crisis.)

Thus barring
commercial banks from effecting stimulus (a la full reserve) is a thoroughly
good idea.

Monday, 25 February 2013

The credit rating agency Moody’s (viewed with derision by
the Chinese government and ignored by Warren Buffet) has just downgraded UK
government debt.

Well the markets don’t seem to agree with Moodys. At least
the UK’s creditors get less of a reward in real terms for each dollar of UK
debt than they do for other major countries. By “real terms” I mean the real or
“inflation adjusted” rate of interest.

In fact taking the yield figures from this Financial Times
site, and inflation figures from here, the inflation adjusted yields on the
debt of Germany, UK, US and Japan are -0.2%, -0.55, +0.4% and +0.6%
respectively.

In other words creditors are prepared to take a lower yield
for the privilege of holding UK debt than holding the debt of other countries. Or to put that more crudely, the UK is ripping
its creditors off more ruthlessly than other major countries (if you count this
God forsaken, rain soaked island where I live as a “major country”).

Britannia waves the rules.

The above is however a very crude back of the envelope
calculation. Errors and omissions expected.

Sunday, 24 February 2013

Stephen Grenville, visiting fellow at the Lowy Institute for
International Policy, gives us the benefit of his views on Adair Turner type
overt monetary funding of deficits. That’s in this Vox article. (h/t to MikeNorman).

It would have been nice if Grenville had studied the
literature on this subject before giving us the questionable benefit of his
views.

Turner would damage central bank independence?

One of his concluding claims is that the above policy might,
as he puts it, “damage central bank independence”. Well, amazing as this might
seem, advocates of a Turner type policy (who have actually been at it long
before Turner adopted / copied their idea) are well aware of the latter
potential problem.

That is, a Turner type policy involves a merge of fiscal and
monetary policy (as pointed out by Mervyn King here). And given that
governments traditionally do fiscal, while central banks do monetary policy, a
Turner type policy runs the obvious risk of giving politicians access to the
printing press, and secondly, (a point missed by Grenville) the risk of central
banks interfering with political decisions.

Well now, there is a simple way of avoiding the two latter
risks. As pointed out in this work, it’s to have decisions on STIMULUS taken by
some sort of independent committee of economists (in fact EXISTING committees
like the Bank of England Monetary Policy Committee would do). While in
contrast, STRICTLY POLITICAL DECISIONS, like what proportion of GDP to allocate
to public spending, and how that spending is allocated, are taken (as they
already are) by the electorate and politicians.

In fact central banks ALREADY HAVE the last word on
stimulus, in that if a government goes what a central bank regards as too much
fiscal boost, the central bank just negates that boost via an interest rate
increase

All in all, to avoid the risk to central bank independence
to which Grenville refers, requires a VERY SMALL change to what committees like
the Bank of England Monetary Policy Committee already do.

Distorting bank balance sheets.

Grenville’s second concluding claim is that a Turner type
policy would distort commercial bank balance sheets in that it would allegedly
force them to hold more reserves than they otherwise would. That claim is
actually nonsense because it confuses what might be called banks’ NET HOLDING
of reserves (or “monetary base”) with their GROSS holdings. I’ll explain.

The large majority of government debt is not held by banks.
In the US and UK banks only hold 2 and 10% of government debt respectively.
That’s according to Credit Writedowns.

So if a Turner policy is introduced, no doubt the private
sector as a whole ends up holding more monetary base. But the vast majority of
those “holders” are private sector non-bank entities.

Of course those entities lodge their monetary base holdings
at commercial banks who in turn deposit same at the central bank. But
commercial banks are simply acting as go-betweens or AGENTS. That is, a Turner
policy does needn’t result in commercial banks NET HOLDING of monetary base
increasing. I.e. while the amount of monetary base owed by central banks to
commercial banks does rise, the amount owed by commercial banks to their
customers ALSO RISES.

Moreover, commercial banks are free to use their stock of
monetary base to buy government debt or any other asset anytime. Thus Grenville’s
idea that some sort of balance sheet distortion is forced on commercial banks doesn’t
stand inspection.

Conclusion.

Fifteen love to Turner and other advocates of merging fiscal
and monetary policy. I look forward to more attempts at ace serves coming from
opponents of that policy.

Friday, 22 February 2013

“People who
lose their jobs after many years of work would receive higher benefits than
those who have not held down a career under proposals being drawn up by Labour.”
So says the opening paragraph of a report on p.2 of today’s Financial Times
(1).

I could have
phrased that a bit better and as follows.

People who
have spent years holding the country to ransom with a view to obtaining
unwarranted job security in the unionised, Labour supporting public sector will
be additionally rewarded by Labour with higher benefits. In contrast, those who
have performed the invaluable public service of making up for the above labour
market inflexibility by getting a series of short term jobs will be penalised.

The stench
arising from that proposal almost equals the stench arising from the money laundering carried out by
Labour prior to the last general election: they gave about £20m to various
trade unions allegedly for “training”. And those same unions by a remarkable
coincidence then gave about £10m to the Labour Party.

And the
stench from that about equals the stench arising from bankster contributions to
the Tory Party.

Thursday, 21 February 2013

Wednesday, 20 February 2013

The U.S.
minimum wage is rising from $7.25/hr to $9. The obvious advantage is improved
income for low skill employees who keep their jobs, and the obvious
disadvantage is increased unemployment amongst the low skilled.

There is
actually an escape from that dilemma. It’s to let employers pay any wage they
like, even $1/hr (with the state making up the wage to the minimum acceptable
take home pay). But where the wage is below some threshold, (say $9/hr), the
state has the right to nab the employee and allocate him/her to a job where the
relevant employer is prepared to pay more, or where state employment agencies
think the skills of the employee would be better used.

The nuisance
involved in having reasonably productive employees nabbed would induce
employers to pay those employees the min wage or more. I.e. it’s only the
genuinely unproductive employees who would get subsidised.

Advantages.

One
advantage of the above system that is that there are an almost infinite number
of potential jobs if you count an activity with an output of $1/hr or less as a
“job”. Thus the latter system has the potential to bring about a HUGE REDUCTION
in unemployment.

Second, the
better availability of jobs makes it easier to impose some sort of workfare
sanction on the unemployed. That is, if there is a dire shortage of jobs, it’s
a bit difficult to say to a member of the dole queue “get yourself a job within
a month, else your unemployment benefit stops”. In contrast, if there are ten
million $1/hr jobs to choose from, it’s relatively easy to impose the latter
sanction. And that in turn means a significant number of the unemployed,
instead of doing $1-9/hr jobs, or remaining unemployed, would get themselves
normal / regular / unsubsidised jobs.

Disadvantages.

As to
disadvantages, an obvious one is the bureaucratic expense of having state
employment agencies allocate labour.

Second, if
the system was run in any sort of a lax way, it would encourage unproductive
work.

Third,
labour turnover would increase. On the other hand there is no harm in those who
temporarily cannot find a job to which they are well suited trying a variety of
different jobs: the very fact of their being unemployed may be evidence that
their previous type of employment is obsolete or demand for the relevant skills
has declined, and thus that they are going to HAVE TO try something different.
And the latter point applies particularly to youths: it’s a good idea for
youths to try a variety of different types of work so as to see which type
suits them.

Plenty of
millionaires started their working lives with a series of dead end jobs.

Non-peer reviewed (or only lightly peer reviewed) publications. The coloured clickable links below are EITHER the title of the work, OR a very short summary (where I think a short summary conveys more than the title).

i) The above is not a complete list in that earlier versions of some papers have been omitted. For a more complete list see here, and “browse by author” (top of left hand column).

ii) 7 deals with a wide range of alleged reasons for government borrowing, including Keynsian borrow and spend. 6 is an updated version of the "anti-Keynes" arguments in 7. 5 is an updated version of 1, which in turn is an updated version of 4.

______________

.

Bits and bobs.

.

The Swiss Sovereign Money movement.

The bank subsidy no one mentions.

I can see the point of making accounts at a country’s central bank available to all, and in having that run on block chain / crypto lines (if that’s the most efficient way of operating those accounts). Accounts with the central bank / government have essentially been available to Brits for decades in the form of accounts at National Savings and Investments. Block chain / crypto could make that more efficient.But what’s the point of an OFFICIAL crypto currency where the units are liable to quaduple in value (like Bitcoin) and then crash?

________

Study puts the value of the Too Big To Fail subsidy for large Canadian banks at around $1.6billion a year for each bank. And what do the regulators and their cronies in the bank industry do? Mumble into their beards, look the other way, and try to sweep the whole thing under the carpet. (hat tip to Stephanie Schulte)________

The first two sentences of Simon Wren-Lewis’s latest article (15th March) made me laugh:

"I was not going to write anything about the non-event of Hammond’s Spring statement, in part because I confess I am tired of writing about the Conservative party’s hopeless macroeconomic policy. It is like being forced to second mark all the fails from a first year economics exam."________

Larry Kudlow is Trump’s new economic advisor. In Dec. 2007 just before the worst recession since the Great Depression, Kudlow said: “There’s no recession coming. The pessimistas were wrong. It’s not going to happen...The Bush boom is alive and well.” Well that bodes well doesn’t it?

But all is not lost. Cheer up! Trump normally sacks those he has appointed a month after appointing them.....:-) ________

Simon Wren-Lewis (Oxford economics prof) does another article in which he expresses interest in MMT.________

It is precisely the fact that private banks are allowed to create or print money that causes bank failures.

Money is a short term liability of a bank. So if banks can create money, they can engage in “borrow short and lend long”, which is what causes bank failures. But that risky method of money creation is totally unnecessary because central banks can supply the economy with whatever amount of money is needed to bring full employment, and all without the above attendant risk.________

Mark Carney, governor of the Bank of England is not impressed by crypto currencies.________

The Fed implemented QE, which is supposed to have a stimulatory effect, at the same time as paying interest on reserves, which has the opposite effect, i.e. a deflationary effect. Unless I’m much mistaken, that equals schizophrenia.________

Nice article in the Financial Times today entitled “George Osborne austerity target is hit…”. The FT seems enthusiastic about the “austerity target” having been hit. I quite agree. I’m looking forward to women being sent down coal mines, young boys being sent up chimneys to clean them, and the re-introduction of Victorian slums (ho ho).

More seriously, the article shows no understanding of Keynes's point that the deficit / surplus needs to be whatever brings full employment without too much inflation. I.e. deficits are not inherently undesirable, and (contrary to the FT's suggestions) surpluses are not inherently desirable._________

Long time ago, oil companies knew that global warming would change the climate, and adjusted the design of their oil rigs and pipe-lines to suit. They then denied the existence of global warming. Don’t you just love it?________

Wall Street crooks manage to roll back stricter regulation and return to the good old "heads we win, tails the taxpayer loses" arrangement. Meanwhile politicians are way too dumb to know what's going on, and anyway their pockets will have been stuffed with wads of dollar bills to make sure they “see sense”.________

Total fines and out of court settlements paid by US banks (since the 2007 crisis I assume) now stands at $243bn.________

Laugh of the day: Mark Carney tells bankers they should not aim to earn loads of money but should aim to “promote……prosperity in the wider society”. ________

Sarah Bedford of the New Economics Foundation claims output of immigrants in the UK is £17million per day. Least that’s what she SEEMS to be saying: it’s not actually 100% clear what she's saying. Anyway assuming my interpretation of her work is right then…. let’s import the entire population of China: then the "output of immigrants" would be a HUNDRED TIMES more!!!!________

I do like Stephanie Kelton’s MMT colouring book. Filling in the colours should be a compulsory for all those with mental ages below three - i.e. all those under three, and all politicians over the age of three -….:-)________

90% of Euro banknotes issued in Germany are never spent: they’re just hoarded!!!!________

Thinking aloud….free banking (advocated by George Selgin and others) comes to the same thing as full reserve banking, seems to me. Reason is that under free banking there is no deposit insurance, thus deposits at banks are essentially equity: so called “depositors” stand to lose their shirts just like shareholders. At the same time, under free banking, depositors who want total safety are presumably free to deposit money at state run savings banks like National Savings and Investments in the UK. And that is effectively full reserve banking: loans are funded via equity, while no risks whatever are taken with deposits that are supposed to be totally safe.________

.

MUSGRAVE'S LAW SOLVES THE FOLLOWING PROBLEM.

The problem. Deficits and / or national debts allegedly need reducing. The conventional wisdom is that they are reduced by raising taxes and / or cutting government spending, which in turn produces the money with which to repay the debt. But raised taxes or spending cuts destroy jobs: exactly what we don’t want. A quandary.

The solution. The national debt can be reduced at any speed and without austerity as follows. Buy the debt back, obtaining the necessary funds from two sources: A, printing money, and B, increasing tax and/or reduced government spending. A is inflationary and B is deflationary. A and B can be altered to give almost any outcome desired. For example for a faster rate of buy back, apply more of A and B. Or for more deflation while buying back, apply more of B relative to A